In San Fransisco, the minimum wage increased from $10.74 to $12.25, which is 14%. It was widely expected that such an increase would cause prices to rise nominally as firms who largely paid minimum wage passed on these costs to consumer as much as the market would allow. For fast food retail operations, where the labor costs accounts for about 30% of expenses, the expected increases were 4-5%. At Chipotle, which claims to pay higher than average, and said last year that a $10 minimum wage could be absorbed, the increase was expected to be much less, if not negligible.
So it surprised me to read the following from Forbes, the gist of which was widely reported over the past few days
San Francisco, however, saw across-the-board price increases averaging over 10%, including 10% increases on chicken, carnitas (pork), sofritas (tofu), and vegetarian entrees along with a 14% increase on steak and barbacoa. We believe the outsized San Francisco price hike was likely because of increased minimum wages (which rose by 14% from $10.74 per hour to $12.25 on May 1) as well as scheduled minimum wage increases in future years (to $13 next year, $14 in 2017, and $15 in 2018). To summarize, due to increased costs of certain meats, the cost of certain meat items are going up 4%. However there will be an overall 10-14% increase, even for non meat items, in San Fransisco. Forbes, quite reasonably, postulates this increase it due to the minimum wage increase. However, as mentioned, the minimum wage increase is only likely contributing a few percent in costs. Also, as mentioned, Chipotle said that a $10 minimum wage was not likely to increase prices significantly. Yet here we are with San Francisco and the new minimum wage coincidentally increases retail prices as much as 14%.It is arguable that Chipotle used the minimum wage increase as an excuse to raise prices. This is what many economist expected to happen. The minimum wage, while not significantly increasing costs, would be used as an excuse to increase profits. In the case of Chipotle, the price increase may in fact be to cover rising rents or other costs. However Chipotle is a trusted chain of stores, who is very price conscious, and whose customers are as price sensitive as those of Taco Bells. It will likely be assumed by many that Chipotle was forced to raise prices due to the increase in the minimum wage.
The upshot is, if these increase do materialize, and if they are sustained, especially over the next year or two as minimum wages increase in San Fransisco and around the country, Chipolte has dealt a serious blow to the fight for a higher minimum wage. They are now going to be the poster child of how minimum wage increases hurt the average consumer. Every time someone says that increased labor costs can be absorbed, Chipolata will be brought up as the caring, progressive, company that was forced to make it's food unaffordable to the masses due to the greedy city who wanted to unreasonable raise the minimum wage not so people could have a better life, but so the city could get more taxes. And as a result the common person can no longer afford a burrito.